Canada dollar weakens on speculation BOC may signal rate easing

The Canadian dollar weakened against the majority of its 16 most-traded peers amid investor speculation the nation’s central bank may signal easing after its policy meeting tomorrow.

Canada’s currency fluctuated versus its U.S. counterpart as service industries in America, the nation’s biggest trading partner, expanded in February at the fastest pace in a year. The so-called loonie gained earlier as oil, the nation’s biggest export, rose from the lowest level in 10 weeks. The Bank of Canada is forecast to keep its benchmark rate on overnight loans between commercial banks at 1%, according to a Bloomberg survey of economists.

“The Bank of Canada is holding the Canadian dollar hostage,” David Watt, chief economist at the Canadian unit of HSBC Holdings Plc, said by phone from Toronto. “The market is pretty bearish. A lot of the bad news has been priced in.”

The loonie, as the Canadian dollar is known for the image of the waterfowl on the C$1 coin, was little changed at C$1.0277 per U.S. dollar at 3:23 p.m. in Toronto. One loonie buys 97.31 U.S. cents.

The country’s benchmark 10-year bonds yielded 1.81%, with the 2.75% security due in June 2022 dropping five cents to C$107.96.

Futures on crude oil rose 0.8% to $90.87 a barrel in New York after dropping to $90.12 yesterday, the lowest settlement since Dec. 24.

‘Hawkish Tone’

BOC Governor Mark Carney last month said the need to raise interest rates is less urgent because the economy will take longer to reach full output, keeping inflation below target until the second half of next year.

“The market has gone from pricing in interest-rate hikes in Canada to pricing in the potential for interest-rate cuts over the next 12 months,” Camilla Sutton, head of currency strategy at Bank of Nova Scotia, said by telephone from Toronto. “I think they maintain an overall hawkish bias, though they continue to pare back that hawkish tone.”

The loonie has dropped 3.8% during the past six months versus nine developed-nation peers tracked by Bloomberg Correlation-Weighted Indexes. The euro has gained 4% while the greenback has risen 0.3%.

Hedge funds are amassing record bets against the Canadian dollar on speculation the Bank of Canada will drop its bias toward raising interest rates, putting it in unison with the rest of the Group of Seven nations.

Bearish Bets

Futures contracts wagering on a decline in the Canadian dollar versus its U.S. counterpart held by so-called leveraged funds totaled C$6.3 billion ($6.1 billion) in the week ended Feb. 26, according to Citigroup Inc., citing U.S. Commodity Futures Trading Commission figures. Overall, the data showed traders reversed bets on a rise in the Canadian currency during the five-day period for the first time in eight months.

The loonie weakened as the Institute for Supply Management’s non-manufacturing index for the U.S. increased to 56 last month from 55.2 in January, the Tempe, Arizona-based group said today. Economists projected the gauge would be little changed at 55, according to the Bloomberg survey median. Readings above 50 signal expansion.

“Canada has had a little bit tougher stretch where the bad news tends to hurt the Canada dollar more than any positive news tends to help it,” Brian Kim, a foreign-exchange strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut, said in a telephone interview.